Archives for February 2019

ROCKVILLE, Md. — Last week the iA institute (parent of insideARM) hosted a roundtable discussion among consumer advocates, regulators, and members of the collection industry. The dialogue was in-depth, candid and engaging. In total, 20 organizations participated, including six consumer groups, two regulators, two creditor trade groups, and ten members of the the Consumer Relations Consortium (CRC).

This session was the seventh of such meetings hosted by the iA institute on behalf of the CRC over the last several years. The goals — to increase understanding of the complexity of the collection process, to identify common ground, to explore creative solutions to challenges facing consumers and industry, and to build trusted relationships — have been the hallmark of the CRC since its inception in 2013.

“This is a unique forum in the debt collection space,” said Stephanie Eidelman, Executive Director of the CRC. “We bring stakeholders together and facilitate a high quality dialogue that goes deeper than the standard public talking points. The facts are always more nuanced than they appear on the surface, and these can only be truly explored in a small, off-the-record setting.”  

Spanning five hours, the sessions always cover a fair amount of ground. At a high level, last week’s topics included the concept of a consumer’s right to request a suspension of collections, the idea of delivering disclosures in a way that consumers can digest and understand, the challenge collectors face in today’s world which demands that transparency be reconciled with the FDCPA’s third party disclosure prohibition, and the uncomfortable authentication dance faced by consumers and collectors in order to begin a conversation.

The CRC will continue to host these dialogues; they are consistently well-received and well-attended, and have contributed to insight into where there are common interests and where there is misunderstanding.

About the Consumer Relations Consortium and the iA institute

The Consumer Relations Consortium (CRC) is a membership group for forward-thinking creditors, technology providers, and larger collection agencies. The CRC has two primary areas of focus: Regulation and Innovation. We engage within the group and externally — with regulators, consumer groups and other stakeholders — to produce common sense legal, process and technology solutions that benefit consumers, creditors and servicers. An important hallmark of the CRC is that the group is small enough to remain nimble and creative, yet large enough to be impactful and representative of the industry. Read more at www.crconsortium.org

The CRC is managed by the iA institute, a media company that influences the professional debt collection community, including those responsible for managing, recovering, and regulating consumer debt. Thousands know us for our flagship publication, insideARM. Beyond the news, iA institute initiatives bring a range of stakeholders to the table in candid and intimate environments to inform, to build a culture of compliance, to actively address industry challenges, and to make profitable connections. The iA institute (under the name insideARM, LLC) is a certified woman-owned and woman-controlled business (WBE) by NWBOC. Read more at www.theiAinstitute.com

This morning, the U.S. Supreme Court issued an order list addressing whether or not it approved certain cases to be reviewed by the court. The order lists one case which insideARM previously wrote about – Huebner v. Midland Credit Management, No. 18-991 —  on the list of denied cases, which means it will not be heard by the court.

We nicknamed Huebner as the “triple-whammy” petition because it asked the Supreme Court to review three relevant debt collection questions that the different Circuit Courts of Appeal do not agree on. Those three questions are:

1. Whether a consumer’s dispute needs to be in writing in order for it to trigger the Fair Debt Collection Practices Act (FDCPA);
2. Whether a debt collector can inquire about the reason for the consumer’s dispute; and
3. Whether the least sophisticated consumer standard is a question of law or a question of fact.

Unlike the Circuit Courts of Appeal, where the parties have a right to have their appeal heard, the U.S. Supreme Court has discretion to choose which cases it will review. To submit a request for the Supreme Court to hear a case, the appealing party files a petition for writ of certiorari. The Supreme Court gets a high volume of petitions and only accepts a small amount of cases. For example, the order referenced above included only one accepted case and a 9 page list of cases where the petition was denied.

insideARM Perspective

The industry is going to have to wait a little longer for an answer to the written requirement question for disputes under section 1692g of the Fair Debt Collection Practices Act (FDCPA). As previously reported on insideARM, there is a jurisdictional split about whether all subsections of 1692g require a dispute to be made in writing. According to the Third Circuit in Graziano v. Harrison, all disputes need to be in writing in order to trigger the FDCPA — an issue that prompted an open letter to the Consumer Financial Protection Bureau.

Fortunately, the Supreme Court’s denial to hear the case means that the Second Circuit’s decision in Huebner stands.

With the volume of decisions popping up within the Third Circuit on the issue (and the hurdles faced by debt collectors due to the jurisdictional split), it seems likely that we will see another petition before the U.S. Supreme Court… and hopefully soon.

Are passive debt buyers debt collectors under the Fair Debt Collection Practices Act (FDCPA)? According to the Third Circuit Court of Appeals in its decision in Barbato v. Greystone Alliance, LLC et al., No. 18-1042 (3d Cir. Feb. 22, 2019), a debt buyer that purchases debts but does no direct collection activity (passive debt buyer) is, indeed, a debt collector and subject to the FDCPA.

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The decision breaks down the FDCPA definition into two categories. According to the court, a debt collector is “any person (1) who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts… or (2) who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due to another.” (Internal quotations omitted.)

While the U.S. Supreme Court stated that a debt buyer is not a debt collector under the latter prong in Henson v. Santander, the consumer here argued that the first prong applies to Crown Asset Management, which purchases debt and has third party collection agencies conduct collection activity. The Middle District of Pennsylvania agreed with the consumer, and now so does the Third Circuit.

The decision discusses the impact of Henson on Third Circuit precedent. Prior to Henson, the Third Circuit used a “default test” to determine whether an entity was a creditor or a debt collector. If the account was acquired prior to default, then the entity is a creditor. If after default, then debt collector. Henson rejected the default test, which now means that the terms “creditor” and “debt collector” are not mutually exclusive.

Since Henson did not address the first prong of the definition and since the two definitions are not mutually exclusive, the court found little weight in applying Henson to its review of the instant case.

Turning to the “principal purpose” discussion, the court rejected Crown’s argument that this applies only to overt collection activity. The court instead found no distinction in whether the collection activity was direct or indirect. The court states:

“Collection” by its very definition may be indirect, and that is the type of collection in which Crown engages: it buys consumer debt and hires debt collectors to collect on it. The existence of a middleman does not change the essential nature—the “principal purpose”—of Crown’s business. As Barbato points out, Crown could buy debt for the charitable purpose of forgiving it, or it could buy debt for the purpose of reselling it to unrelated parties at a profit. In both of those cases, the entity’s “principal purpose” would not be collection. But Crown does neither of those things. Indeed, the record reflects that Crown’s only business is the purchasing of debts for the purpose of collecting on those debts, and, as Crown candidly acknowledged at oral argument, without the collection of those debts, Crown would cease to exist. In short, Crown falls squarely within § 1692a(6)’s “principal purpose” definition.

insideARM Perspective

The Third Circuit’s summary of the District Court’s decision states the following regarding vicarious liability:

The District Court nevertheless denied Barbato’s motion for summary judgment, holding that she had not established that Crown was vicariously liable for Turning Point’s conduct because (1) in the District Court’s view, vicarious liability could be imputed to Crown in these circumstances only if the agent too was a “debt collector,” and (2) the evidence in the record was insufficient to hold that Turning Point was a debt collector under the FDCPA.

(Emphasis added.)

What does this imply? Does this mean that that a passive debt buyer is on the hook for alleged FDCPA violation of its third party collection agency if both are found to be debt collectors by a court? With the current state of litigation and pre-litigation claims against debt collectors, often times filed in droves on hyper-technical issues, what impact will a decision like this one have on the operational relationship between passive debt buyers and their collectors?

WESTBOROUGH, Mass. —  Associated Credit Services, Inc. (ACS), headquartered in Westborough, MA, is proudly celebrating its 50 year anniversary with the announcement of the opening of a second call center in Tewksbury, MA. The new state of the art call center more than doubles ACS’ collection capacity.

ACS President and CEO Andrew Robinson commented, “ACS is proud to provide this new state of the art call center to our clients and employees. We are grateful to our legacy client partners for rewarding our commitment and performance with significantly increased market share, and to the many new clients who are just beginning to experience the proven advantages of our approach. With that added trust comes our additional responsibility to ensure that we have the capacity to continue to perform at the highest level and exceed client expectations. Our new call center ensures exactly that.”

About Associated Credit Services, Inc.

Established in 1969, ACS is celebrating 50 years as an award winning accounts receivable management company boasting an A+ rating with the BBB. ACS specializes in Banking, Utility, Healthcare, Insurance and Commercial third party collections as well as first party Default Prevention initiatives. For more information about Associated Credit Services, Inc. you can view our website at www.acsrecovery.com or contact us at 1-800-531-6500. You can also connect with us on LinkedIn at https://www.linkedin.com/company/associated-credit-services-inc-acs- 

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Last week, the Federal Communications Commission (FCC) announced that it released proposed rules banning illegal spoofed text messages and calls from overseas, where it is widely believed many of these spoofed communications originate. A copy of the Notice of Proposed Rulemaking can be found here.

The RAY BAUM’S Act of 2018 extended the applicability of the Truth in Caller ID Act of 2009 to calls and text messages that originate from outside of the country. The proposed rules implement the statute and extend the prohibitions to short message service (SMS) and multimedia message service (MMS) text messages as well as one-way interconnected VoIP calls.

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In their individual statements, the Commissioners unanimously supported the action, although some are more reserved about the solution than others.

“While the expanded jurisdiction provided by [RAY BAUM’S] Act won’t solve all the challenges involved in bringing foreign criminals to justice, such as obtaining traceback-related subpoenas and accessing the cooperation of countries with weaker legal institutions, the explicit provisions should at least help the Commission cut through red tape in friendly nations,” states Commissioner O’Reilly.

Chairman Ajit Pai stated that the FCC received more than 52,000 complaints last year about caller ID spoofing and discussed how he demanded earlier this week that industry deploy a robust caller ID “authentication” system. Commissioner Carr notes that robocalls are the FCC’s top enforcement priorities. However, Commissioner Rosenworcel argues that the Commission is not doing enough in the enforcement category considering the prevalence of the issue. She states:

But I think rulemakings and reports have their limitations. It’s action that counts. In the past twenty-four months, this agency has had no more than a handful of enforcement actions involving illegal robocall[] schemes. Our work is too slow. We are trying to empty the ocean with a teaspoon. We need more dedicated resources. […] Why not create a division that will combat robocalls? If year-in and year-out this is the single largest source of consumer complaints at this agency, how about organizing our enforcement efforts to reflect that? I think that’s what we need to do and I think the time to do it is now. Before spoofed calls, robocalls, Rachel calls, or any of it gets any worse

According to Commissioner Starks’ statement, innovation must continue at the FCC. “We must continue to refine our tools, because we can be sure robocallers will try to find new and innovative ways to break through. In this battle, this additional authority [provided by RAY BAUM’S ACT] is essential and welcomes – the Commission will be better able to find illegal robocallers, stop them, and hold them accountable.”

insideARM Perspective

The proposed rules were issued on the same day as the report on illegal robocalls. The report mirrors the Commissoners’ statements above about the prevalence of spoofed robocalls and discusses the different initiatives the FCC has undertaken to combat this issue. The report listed four challenges facing the FCC in enforcement against spoofed robocalls:

• Many illegal robocalls seem to originate in foreign countries.
• These calls appear to be coming from VoiP providers, many of whom do not update the FCC nor keep accurate records of all calls made across their networks
• The short statute of limitations for Telephone Consumer Protection Act (TCPA) actions makes it difficult for the FCC to complete complex investigations into the issue.
• Notice via citation requirements that the FCC must follow prior to a forfeiture proceeding give time for offenders to incorporate under a new name and evade the issue.

The proposed rules would likely address the first issue, but the other three remain open. Solving for these issues isn’t simple. For example, increasing the statute of limitations for the TCPA might give more time for the FCC to investigate overseas spoofers, but it would cripple businesses — some to the point where they can no longer operate and have to close — because of the downpour of TCPA litigation resulting from inconsistent court rulings and lack of clarity from the FCC in how the statute should be interpreted. Any solution to the above-listed challenges must be viewed in context of the whole landscape.

The clash between the Third Circuit and just about every other jurisdiction regarding whether or not there is a written requirement for all disputes made under section 1692g of the Fair Debt Collection Practices Act (FDCPA) continues.

In Goodman v. Mercantile Adjustment Bureau, LLC, No. 18-cv-04488 (E.D.N.Y. Feb. 19, 2019), plaintiff argued that the debt collector’s letter would lead a least sophisticated consumer to believe that disputes must be in writing. In other words, the exact opposite of what is being argued within the Third Circuit. Read on to see how this one played out.

Background

Mercantile Adjustment Bureau, LLC, the defendant in this case, sent a collection letter to plaintiff Mindy Goodman that mirrored the validation notice language of the FDCPA. In the top right corner, the letter listed an address block that looked like this:

165 Lawrence Bell Drive, Suite 100
Williamsville, NY 14421-7900
1-866-513-9461
Please send payment or correspondence to:
Mercantile Adjustment Bureau, LLC
PO Box 9055
Williamsville NY 14231-9055

The letter again lists Mercantile’s phone number in the body of the letter and repeats its street address and phone number at the end of the letter.

Plaintiff filed an FDCPA lawsuit against Mercantile alleging that the letter’s instructions to “sent payment and correspondence” to an address leads a least sophisticated consumer to believe that he can only dispute the debt in writing. Mercantile filed a motion to dismiss the case.

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The Court’s Decision

The court, thoroughly unpersuaded by plaintiff’s arguments, granted Mercantile’s motion to dismiss. According to the court, the etter “contains a validation notice that accurately conveys the information required by the statute and does not ‘overshadow or contradict’ that notice simply by providing consumers an address for them to send ‘payments and correspondence.’”

Plaintiff fell flat with her argument that the limitation in the address box leads to confusion. Reviewing the letter, the court read the limitation simply as a means to communicate Mercantile’s preference that written correspondence be mailed to the P.O. Box rather than the street address.

Plaintiff argued that the phone number provided refers only to payments, but the court found that this is not so. Specifically, the court stated that the phone number was provided in several prominent locations on the letter without limitation or commentary.

The court distinguished the letter from court cases cited by plaintiff. In the cited cases, the court noticed that the request for written correspondence was found in the same section as the validation notice, which could lead the a consumer to think that all disputes must be in writing mailed to that address. However, the validation notice in Mercantile’s letter is in a completely different section than the address box. The body of the letter also contains two references to mercantile’s phone number. Because of this, the court found that the letter more closely resembles cases that found no overshadowing.

Plaintiff attempted to change her position midway through her opposition brief, which did not impress the court. Instead, the court ponders that this might have been due to “recognizing the weakness of her argument.” In the opposition brief, plaintiff attempts to argue that the letter overemphasizes the consumer’s rights to dispute the debt by phone, thus making the least sophisticated consumer believe that they can obtain validation of debt by lodging an oral dispute. The court dismissed this argument since the validation notice language explicitly states that to receive validation of debt, the consumer must send the request in writing to the debt collector.

The court went on to address the circuit split on the issue. Even though the Eastern District of New York falls into the Second Circuit, plaintiff attempted to cite several Third Circuit cases. The court responded:

[T]hose cases are entirely irrelevant, as the Third Circuit disagrees with [the Second Circuit case] Hooks and has read a ‘writing’ requirement into all dispute-related provisions of section 1692g.

insideARM Perspective

The case law on this issue is all over the place. The Third Circuit requires that all disputes under 1692g be in writing. As illustrated above, other circuits disagree. Within the Third Circuit, the Eastern District of Pennsylvania and the District of New Jersey cannot seem to agree about whether or not an almost identical letter confuses a consumer about dispute procedure. 

Thankfully there is currently a pending petition for the United States Supreme Court to review the issue and hopefully provide uniformity to validation notice requirements.

Last week, the Federal Communications Commission (FCC) released its first report on illegal robocalls, which outlines what the FCC have been working on to fight this issue. Here are some highlights from the report.

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1. Robocall Regulations

The report outlines the different laws and regulations that help the FCC regulate robocalls, including the Telephone Consumer Protection Act (TCPA), Truth in Caller ID Act, and Do Not Call Implementation Act. The report also adds a side note that other industry-specific laws might apply, specifically calling out the Fair Debt Collection Practices Act (FDCPA).

2. Volume of Robocalls Continues to Increase, As Does Volume of Complaints

The volume of robocalls continues to increase, according to the report, but the data lumps together both legal robocalls made by legitimate businesses trying to communicate with their customers and illegal robocalls made by scammers. The FCC recognizes that legitimate business do try to make calls to their consumers in compliance with the TCPA, but that the framework created by legitimate businesses to place high volumes of calls to their customers also provides a ripe environment for scammers to take advantage of the situation.

The report notes a fluctuating, but generally increasing, amount of complaints made about robocalls. This is due to a number of factors according to the FCC, including an increase in robocalls, outreach to consumers about how to file complaints, and consumers filing complaints against legal, legitimate calls.

3. Caller ID Authentication

One initiative that the report mentions is actively being pursued is Caller ID Authentication. In other words, confirming that the call received by the consumer is actually coming from the number displayed. The FCC’s Chariman Ajit Pai called on voice service providers to “adopt a robust call authentication system and launch that system no later than 2019.” Comments to Chairman Pai’s request confirmed affirmed providers’ commitment to this cause.

4. Enforcement Initiatives

Between 2010 and 2018, the FCC imposed monetary forfeitures of almost $246,000,000 through enforcement actions. These enforcement actions were brought against purported violates of the TCPA and the Truth in Caller ID Act.

5. Challenges Facing the FCC

The report lists several challenges that the FCC is facing in its efforts to combat illegal robocalls. These include:

• Many illegal robocalls seem to originate in foreign countries.
• These calls appear to be coming from VoiP providers, many of whom do not update the FCC nor keep accurate records of all calls made across their networks
• The 1 year statute of limitations for TCPA actions makes it difficult for the FCC to complete complex investigations into the issue.
• Notice via citation requirements that the FCC must follow prior to a forfeiture proceeding give time for offenders to incorporate under a new name and evade the issue.

insideARM Perspective

One very interesting comment made in this report states:

When their phone rings, consumers may not have enough information to tell whether the call is wanted, unwanted, or illegal. The phone may display Caller ID and possibly a label from their voice service provider or a third-party application.  But Caller ID may be spoofed or blocked, and labelers may not have complete information about the calling party. Currently, the only certain way to determine whether a call is wanted or unwanted is to answer it or let it go to voicemail, and hope the caller leaves a message.

(Emphasis added).

The FDCPA, as well as case law that interprets the statute, lays out many restrictions about what a debt collector can and cannot say when communicating with consumers. The debt collector generally may not reveal information about the account to third parties, which causes an awkward authentication dance in the beginning of phone calls. The two most recent editions of iA’s Video Series discuss this exact issue (here are links to Part 1 and Part 2). Voicemails go a step further: debt collectors have prescribed scripts they need to use in order to leave voicemails that do not trigger an onslaught of litigation. The scripts are somewhat vague and, quite frankly, would make it difficult for a consumer to determine whether the voicemail came from a legitimate business.

When a consumer receives a call from a debt collector using a number unknown to the consumer, the report states that the consumer has two choices to determine whether the call is legitimate: answer the call (which only happens 52% of the time) or wait for a voicemail. The voicemail, as discussed above, will sound weird, decreasing the odds of the consumer calling back.

This illustrates what we at insideARM have been stating for a while: debt collectors are left in the dust.

Last week I described the awkward authentication dance that consumers and debt collectors must endure before a collector can reveal the purpose of his call. This dance is required because the FDCPA prohibits a collector from communicating with a third party about a consumer’s debt.  Because of technology advancements and, unfortunately, the growth of scams, the current way this prohibition is interpreted has become more and more problematic for all parties.

Can this really be as difficult as it appears to be? In today’s video, I share a perfect illustration in the form of a real life scenario described by a commenter on a recent insideARM article. I also describe a solution to the problem, which the Consumer Relations Consortium proposed to the CFPB last November. We are all looking forward to the long-awaited Notice of Proposed Rulemaking from the CFPB (expected sometime in the next couple of months) to see whether this — and other challenges that have been raised by industry over the last five years — will be addressed.

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In Francisco v. Midland Funding, No. 17 C 6872, 2019 U.S. Dist. LEXIS 20601, at *2 (N.D. Ill. Feb. 8, 2019), the plaintiff sued Midland Funding LLC and Midland Credit Management, Inc. (“MCM”) under the Fair Debt Collection Practices Act (“FDCPA”) for the failure to promptly report the plaintiff’s account as “disputed” to credit bureaus. The FDCPA prohibits debt collectors from “[c]ommunicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.” 15 U.S.C. § 1692e(8) (emphasis added).

MCM services millions of debt accounts and prepares reports of account disputes in bi-weekly batches. The evidence presented by MCM reflected that it had a practice of compiling batches of disputed debts every other Monday and reporting such disputed debts to the credit bureaus every other Friday. Unfortunately for MCM, the plaintiff submitted a dispute letter to MCM on Tuesday, August 22, 2017, but MCM did not report her debt as disputed to the credit bureaus until Friday, September 8, 2017. In the interim, MCM continued to report to the credit bureaus that the plaintiff owed a debt, but did not report that it was disputed.

Citing to 15 U.S.C. § 1681i(a)(1)(A), MCM argued that it complied with the FCRA, which gives credit reporting agencies up to thirty days to investigate disputes, and thus, should not be held liable for an FDCPA violation, having reported the plaintiff’s debt as delinquent within FCRA’s 30 day investigatory period. The US District Court was not persuaded. Citing Seventh Circuit precedent from Evans v. Portfolio Recovery Assocs., 889 F.3d 337, 348 (7th Cir. 2018), the Court held that FCRA does not excuse the obligation to promptly report a disputed debt under the FDCPA stating that “taking time to investigate a dispute [under FCRA] does not give a debt collector license to send a false report while the investigation is underway.”  Thus, the Court found that MCM had violated the FCDPA.

While that finding is troubling, the Court concluded that the plaintiff had not demonstrated actual damages for the three week delay in reporting her debt as disputed. Nonetheless, it concluded that the plaintiff could still recover statutory damages for the FDCPA violation.

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Editor’s note: This article is provided through a partnership between insideARM and Womble Bond Dickinson. WBD provides a steady stream of their timely, insightful and entertaining take on this ever-evolving, never-a-dull-moment topic. WBD – and all insideARM articles – are protected by copyright. All rights are reserved.

There have been several developments in the Department of Education’s (ED or Department) NextGen saga in recent weeks. Here’s what’s happened:

I last wrote about this in mid-January, when ED released a “re-do” of its solicitation for business process services under its ambitious NextGen project.

[Editor’s Note: If you need to catch up on how we got to the point of the re-do, this article has a great recap.]

Reaction to the new solicitation was mixed. Some were impressed with the obvious thought behind the multi-part RFPs. Some suggested the Department must have been assisted by the bidder most likely to receive the massive contract. As for those in the private debt collection community, the new version raised serious questions.

Federal Student Aid (FSA) wants the full life cycle of servicing to occur under its own brand. The Debt Collection Improvement Act of 1996, however, requires Federal agencies to “REFER” debts to private collection agencies and the costs to be paid from the proceeds of collection. This makes it budget neutral. FSA must necessarily change appropriation process in a highly volatile 116^th Congress with little bi-partisan support for certain key issues such as education.

Other questions include:

• How will FSA address the “bundling” issue, where PCA work is being bundled with servicing? Office of Management and Budget (OMB) Circular A-129 describes two separate regimes for loan servicing and debt collection, and FSA senior officials have already stated multiple times in the last two years via affidavits in Court that Servicing and Collections are separate and distinct.
• Bundling loan servicing and default collection services creates an internal conflict of interest for any awardee because there is a perverse incentive to shift work to that service which provides the highest compensation structure. Evidently this did not work in the old Guaranty Agency days under the FFEL program.

Meanwhile, as a result of its issuing a new solicitation, ED motioned the Court of Federal Claims to dismiss the case of Navient Solutions, LLC et al. v. The United States. On February 7, Continental Service Group, Inc. (ConServe) filed a brief opposing the motion, and shortly thereafter FMS Investment Corp. (FMS) filed a motion for leave to file a supplemental complaint. Both are private debt collectors (you’ll recognize them from the recap), and claim that the revised solicitation improperly bundles servicing and default collection services. 

Nonetheless, ED’s motion was granted on February 12, 2019; the consolidated cases (Nos. 18-1679 C, 18-1758 C, 18-1786 C, 18-1813 C, 18-1824 C, 18-1852 C and 18-1853 C) were dismissed without prejudice.

[Editor’s note: Dismissal without prejudice means that the plaintiff is free to re-file a case against the defendant based on the same claim.] 

Judge Wheeler told the parties that if they wish to protest the new solicitation, the Court would open a fresh docket to address the complaints.

If you read the recap of how we got here, you’ll note that I’ve dubbed the dismissed Navient case “Chapter 5” in this story that began five years ago. I typically end chapters upon dismissal of a case, and begin new chapters upon the filing of new litigation and assignment of a new docket. At the moment we’re lingering, waiting for a new chapter to begin. Meanwhile, the Court held a status conference last Friday afternoon, just before the holiday weekend. Sources tell insideARM that Judge Wheeler expressed continued frustration with the situation; he said he wished ED would mediate the matter with the contractors, but unfortunately they have not expressed a willingness to do so. Sources also tell insideARM that new lawsuits will likely be filed this week.

Against this backdrop, last week the U.S. Department of Education Office of Inspector General (OIG) released its latest audit report evaluating the performance of FSA’s oversight of servicers. The OIG report highlighted two major Findings:

First – FSA did not track all identified instances of noncompliance and rarely held servicers accountable for noncompliance with requirements.

Further, FSA did not track all information necessary to identify trends in servicer noncompliance with federal requirements. OIG found that about 61 percent of the documents analyzed disclosed instances of noncompliance related to forbearances, deferments, income-driven repayment, interest rates, due diligence, and consumer protection. Primarily, servicer representatives didn’t always inform borrowers of the available repayment options, and incorrectly calculated income-driven payment amounts. OIG also found that noncompliance rates, and FSA’s documentation of these instances, differed significantly among servicers (see tables 1 and 2 below).

While the tables above represents FSA’s failure to document servicing errors, OIG’s report notes that the rate of servicing errors themselves were actually much higher, including 9.2% for Navient and 24.2% for PHEAA. PHEAA had been chosen to proceed from Phase 1 to Phase 2 of the now cancelled first round of the NextGen solicitation for business processing services.

Second – FSA did not always collect information necessary to evaluate servicer interaction with borrowers.

OIG’s audit found that in 8.2% of instances audited, FSA employees didn’t follow procedure by completing a scoresheet for monitored calls. In other instances, FSA’s system wasn’t sufficient to identify call sheets that were not completed properly. OIG also found that, from June 2016 through March 2017, FSA didn’t communicate the results of its call monitoring activity to servicers. FSA said this was because they were revising the report format.

FSA neither agreed nor disagreed with the findings but agreed with OIG’s recommendations for improvement and says it has already implemented new quality control measures – including a QA process for the QA process.

insideARM Perspective

ED has signaled that it would prefer not to contract directly with private debt collection companies. It prefers to use a smaller number of large servicers to handle the whole cycle of student loan servicing and collection. The OIG’s report, and lawsuits filed by state and federal regulators, would suggest that not all of these servicers are perfect at the job either.

Turns out, it’s an incredibly complex job with a seemingly endless number of processes requiring lots of manual handling by thousands of human beings. In this New York Times article Navient CEO John F. Remondi said “[California’s suit] is another attempt to blame a single servicer for the failures of the higher education system and the federal student loan program to deliver desired outcomes.”

It’s not my place to let anyone off the hook for servicing failures. I will, however, imagine for just a moment what might transpire during a phone call between a borrower and a call center employee at a servicer or debt collector, and how it could be possible that all options may not be presented. First, let’s assume it’s a tense call. The borrower is not happy to be having the conversation at all. And, they’ve likely had to jump through some hoops to prove they are the person they claim to be before the conversation could begin at all.

Now, the servicer/collector asks a bunch of seemingly intrusive questions about the borrower’s finances. They get into a discussion of pretty complex topics that aren’t black & white, and aren’t terribly simple to explain/understand. Is it possible that conversations like this get derailed by frustration, lack of understanding, interruptions by children or employer, a quick decision to pursue the first option and get off the phone, or any number of other circumstances? Would this set of events cause an auditor to have to check the box “no,” all options weren’t explained? 

I get that some servicers had more failures than others, so clearly there is more going on than what I’ve imagined. But let’s acknowledge for a moment that maybe the process is so incredibly complicated that some amount of failure is inevitable. I’d focus at least as much on root cause as I would on QA-ing the QA people.